THIRD PARTY GUARANTORS SHOULD SEEK LEGAL ADVISE.

Last Sunday,i received disturbing news on a house sold at TZS 30million by the bank's auctioners to repay bank's outstanding loan. Those close to the story narrated that the owner of the house bullied by a friend to provide the house title in order to secure the loan taken by the friend. Once the loan was taken, the owner was given TZS 2million as 'positive gesture for his co-operation'. However, house owner was shocked to realise that the friend was not repaying the loan as it should leading the bank to auction the house!

Third Party Guarantors/Security Providers-Seek Legal Advice

It is not first time such event to occur in Tanzanian Banking industry, where by borrowers using other people's title (commonly known as third party securities) to secure the debt default leaving house owners in disgraceful conditions. Whereas some house owners are lucky especially when the bank officials outsmart the borrowers and gets hold of the borrowers before it is too late others dont believe their eyes when they loose their house and kicked out.

This is what happened last Sunday, where by the house owner was given few days to vacate or face forcefull evacuation. A draft Code of Banking Practice alert customers and the general public that, "Binding yourself as a surety for another person’s debt is a risky decision. You must keep in mind that you are effectively undertaking to take on the responsibilities of that other person in the event that he/she/it does not honour his/her/its responsibilities in accordance with the terms and condition agreed to between that person and the bank. You should take independent legal advice before agreeing to be a surety or guarantor."

Banks Should Change Approach.

Most banks have started to review their policies on third party security after realizing that innocent civilians are bullied by conmen or bad borrowers, paid token money to let their house title secure debts/loans. Ultimately, some borrowers disappear or fail to co-operate with banks forcing banks to exercise their right over the mortgaged house. Now banks requires third party security should be from a family member, hoping that it will be hard for one family member to endanger the interest of onother family member. However, more need to be done such as:

1. Reduce dependence over the collateral and focus on the potential of business. Days where by bankers used to be smart and well informed about a variety of business seems to be ending if not non-existent in Tanzania retail banks. As a result, banks rely on the value of the collateral and few details are analysed in regards to customer's business, gowth potentials, risks and how they can be mitigated. This approach needs to be reversed where by much analysis and cross-analysis should be directed towards the business and the customer character and expertise before credit is approved. Banks should be mindful that little information is harmful and capitalise on gathering reliable business intelligence.

2. Employ Robust Portfolio Management Techniques. Before considering customers for business credit, realistic and genuine evaluation must be carried out by skilled bank officials in that line of business or industry, carry out window shopping, and sit in visits for one hour or two to see the 'to and from'. Personal credit must be offered after evaluating the industry in which the employee works, the company performance, employee relationships and performance. After credit is offered, constant monitoring of the account turnover is not enough since this can be dressed to portray positive performance. Sit in visits and window shopping must continue as well as keep in touch with the customer and observe any change in the course of running the business.

3. Someone in the bank must be accountable for default. No accountability, no performance! In event of default, someone must be responsible, accountablee for the default beyond tolerable limits. It could be branch manager or relationship officer/manager, credit analyst, credit manager depending who evaluated the customer, probability of defect on analysis and acts of negligence. Some banks have employed this technique and it works well. For-example, at NMB Branch Managers take ownership of credit booked under the branch and if non-performing loans goes beyond 5% without reasonable justification, he/she is shown the exit door. This should not only aims to protect the bank but also third party guarantors lets they pay the price alone for mistake committed by bankers themselves when offering a credit.

Central Bank and Government should take action.

Default is the credit risk facing banking business for ages. Some banks manage to keep their non-performning loans below 5% while others is above that. So far much focus by the central banks are directed to protect depositors and require banks to demand collateral whatever may be at the expense of borrowers or their surety who are on the verge to loose their houses as collateral.

It is not too late for central banks during their normal reviews of banks to review credit files where a house as collateral was sold or about to be sold and examine the details of the file in order to ensure that business risks were properly identified and mitigated, all possible corrective course of actions were taken, rebust portfolio management techniques are effective among others in order to protect borrowers too from bank's unethical practices, miscalculations and conflict of interest. Any serious breach to the best practice, regulations and internal bank policies should lead to punitive measures to those concerned.

Time to act is now before more innocent civilians suffer for 'crime' they didnot commit.